“All that glitters is unfortunately sometimes only gold…”

Gold30+ years in financial services is certainly enough time to have seen a thing or two in the investment markets.

A hardy perennial, as they might say on Gardener’s Question Time, is the subject of investing in gold.

I might even to confess to dabbling a bit in (I think) Mercury’s Gold & General fund back in the day.

Having met with a potential new client and presented our Dimensional driven passive investment strategy which seemed to make sense on lots of levels, I’ll leave it to Weston J Wellington, Vice President of DFA to make the case for not investing with your eyes and heart in the case of gold and stick to a more considered approach.

“Although the year is far from over, it’s off to a rough start for gold enthusiasts. A sharp selloff in mid-April sent bullion prices to $1,395 on April 15, down 15.7% for the year to date and 26.4% below the peak of $1,895 reached in early September 2011. (Prices are based on the London afternoon fix.) For the 10-year period ending March 31, 2013, gold enthusiasts have a more positive story to tell: The annualized return for gold spot prices was 16.83%, compared to annualized total returns of 8.53% for the S&P 500 Index, 10.19% for the MSCI EAFE Index, 17.41% for the MSCI Emerging Markets Index, and 2.34% for the S&P Goldman Sachs Commodity Index.

Taking a somewhat longer view, for the 40-year period ending March 31, 2013, gold performed in line with many widely followed fixed income benchmarks, while lagging behind most equity indices. We find it ironic that the return on gold over the past four decades is essentially indistinguishable from five-year US Treasury notes, often scorned by gold advocates as “certificates of confiscation.”

Gold vs. Benchmarks, 1973–2013*

Index

Annualized Return (%)

Growth of $1

Dimensional Large Cap Value Index

12.89

$127.75

Dimensional US Small Cap Index

12.67

$117.96

S&P 500 Index

10.18

$48.30

MSCI EAFE Index (gross div.)

9.05

$31.96

Barclays US Credit Index

8.31

$24.33

S&P Goldman Sachs Commodity Index

8.21

$23.51

Barclays US Government Bond Index

7.85

$20.53

Five-Year US Treasury Notes

7.69

$19.40

Gold Spot Price

7.63

$18.95

One-Month US Treasury Bills

5.29

$7.86

Consumer Price Index

4.30

$5.39

*40-year period ending March 31, 2013.

Considering the volatility of gold prices, even a 40-year period is too short to provide conclusive evidence regarding gold’s expected return. And the issue is further clouded by shifts through time in the legality of gold ownership and its changing role in various monetary systems worldwide. In his book The Golden Constant, published in 1977, University of California, Berkeley Professor Roy Jastram examined the behaviour of gold in England and America over a 400-year-plus period—and suggested that the long-run real return of gold was close to zero. Even with centuries of data to study, however, he couched his conclusions in cautious language.”

I can understand the allure but the evidence seems clear enough to me that gold just might be another get rich quick scheme that might not live up to its billing.

Roland Oliver

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